BY COMFORT OGBONNA
Global financial markets came under renewed pressure on Friday as rising oil prices intensified inflation concerns, pushing government bond yields to multi-year highs and sending Asian stocks sharply lower as investors prepared for the possibility of further interest-rate increases from central banks.
Brent crude climbed to a four-month high of $109.97 a barrel after gaining 6% overnight before retreating slightly under pressure from profit-taking. The benchmark was last down about 0.6% at $107 a barrel but remained on track for an 11% weekly gain.
The surge in oil prices has been driven by growing concerns over supply disruptions in the Middle East, where shipping routes remain under pressure. Oil flows through the Strait of Hormuz have been restricted as tensions between the United States and Iran continue, while Iran-aligned Houthi forces have expanded their control in Yemen, including the port city of Mocha, raising concerns about threats to Saudi oil exports through the Red Sea.
“Maritime traffic through the Bab el-Mandeb is gravely imperiled by the Houthi advances,” said Helima Croft, head of global commodity strategy at RBC Capital Markets, warning that Brent crude could rise to $121.99 a barrel later this year if regional conflict expands.
The developments have forced investors to reassess the possibility of a prolonged conflict and its impact on energy markets. Higher oil prices have increased concerns that inflation could remain elevated, making it more difficult for central banks to ease monetary policy.
The impact was reflected across global bond markets. The benchmark 10-year U.S. Treasury yield rose as much as 3 basis points to 4.9790%, its highest level in three years and just below the closely watched 5% threshold.
The increase in Treasury yields has raised borrowing costs across the economy and added pressure to government finances, with higher interest expenses on U.S. debt. The 30-year Treasury yield also climbed to a 19-year high of 5.3836%, contributing to higher mortgage rates and further challenges for the housing sector.
The two-year Treasury yield reached a 14-month high of 4.5961% after rising 12 basis points overnight as investors increased expectations that the Federal Reserve may need to raise interest rates to address inflation concerns.
The recent bond market selloff was also partly linked to a Treasury bond buyback programme that attracted less participation than investors had anticipated, adding to market volatility.
Pressure spread to Asian bond markets, where Australia’s three-year government bond yield jumped 14 basis points to a 15-year high of 5.01%. Japan’s 10-year government bond yield rose 8 basis points to 2.98% as data showing persistent wholesale inflation strengthened expectations that the Bank of Japan could raise interest rates soon.
Attention has now shifted to U.S. consumer price data for August, which could play a major role in shaping expectations for the Federal Reserve’s next policy decision. Forecasts point to a 0.2% monthly increase in the core consumer price index, although recent producer-price data has raised concerns that inflation may prove more persistent.
Analysts at JPMorgan said they now expect most major developed-market central banks to raise interest rates by the end of the year, including the Federal Reserve, Bank of Japan, European central banks, and the central banks of Australia and New Zealand.
“The tightening is for now expected to remain shallow, but risks to our forecasts lean in the direction of more action in the face of resilient growth, sticky core inflation, and commodity price pressures,” analysts said in a note.
The European Central Bank recently increased interest rates for the second time this year, while some policymakers have indicated that further tightening could remain possible if inflation pressures continue.
Rising bond yields also weighed heavily on equity markets as higher interest rates increase the discount rates used to value companies, reducing the attractiveness of future earnings.
MSCI’s broadest index of Asia-Pacific shares outside Japan fell 1.5%. Japan’s Nikkei index dropped 2.2%, while China’s blue-chip CSI300 index declined 0.8% and Hong Kong’s Hang Seng index lost 0.6%.
European markets were expected to open more calmly, with regional stock futures largely unchanged after bond yields in the region had already reached multi-decade highs. U.S. stock futures were also relatively stable, with Nasdaq futures little changed and S&P 500 futures slightly higher.
The U.S. dollar strengthened alongside rising Treasury yields, gaining 0.4% against major currencies overnight before holding steady at 99.04 on Friday.
In commodity markets, gold edged higher by 0.4% to $4,334 an ounce after falling nearly 2% in the previous session. The precious metal failed to attract stronger safe-haven demand despite continued uncertainty in global markets.
Investors are now closely watching inflation data, oil price movements and central bank decisions for signs of whether the current market pressure will continue or begin to ease.
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